A transfer tax can also apply to transferring cash or other types of assets as a way to pass on wealth to family members. For example, a parent might want to pass on an inheritance to their children, but depending on how much they leave in their estate, that transfer could be taxed. A transfer tax can be assessed by different types of governments, such as when city or county governments impose real property transfer taxes or when the federal government imposes transfer taxes related to passing on assets to heirs. Depending on what’s being transferred and where, the assessment rules can vary. With real estate transfer taxes, for example, a fee may be collected as part of closing costs and given to the county recorder’s office so that the seller can transfer the title to the buyer.
Examples of a Transfer Tax
In Nevada, when real property is transferred, such as when a house is sold, there is generally a baseline tax of $1.95 for each $500 in value of the property, though certain exemptions apply. So, the sale of a $500,000 home could result in a transfer tax of $1,950. The seller often pays the transfer tax (subject to local laws), but that is something that can be worked out as part of a real estate negotiation. The IRS might also collect transfer taxes, such as when an heir receives a large inheritance and files an estate tax return. However, the taxes on transfers of wealth tend to be reserved for much higher amounts, so they’re generally not as common as real property transfer taxes. For example, the lifetime gift and estate tax exemption is higher than $10 million for individuals.
Types of Transfer Taxes
There are four main types of transfer taxes: real property, gift, estate, and generation-skipping.
Real Property Transfer Taxes
These taxes are assessed when real property such as housing gets transferred between two parties. Certain exclusions may apply, however, such as in Nevada where transfer taxes do not apply to a title change between former spouses as part of a divorce.
Gift Taxes
During someone’s lifetime, they may decide to gift money or other assets to their children or other family members. These transfers could potentially be taxed, as the government does not want someone to avoid paying an estate tax by giving away all of their money right before they pass away. That said, gift tax tends to only apply to very wealthy people.In tax year 2022, an individual can gift $16,000 per person before they even have to count a gift toward the lifetime gift and estate tax limit. In tax year 2023, the limit is $17,000. So, a married couple could gift up to $32,000 in 2022 to a child. Anything above these amounts then counts toward the lifetime limit, which is set at $12.06 million in tax year 2022 and $12.92 million in 2023.
Estate Taxes
Estate taxes can also be a type of transfer tax, which can apply when a large inheritance gets passed on. The value of an estate can include cash and anything else that the deceased individual owns or has an interest in, such as land or a business. However, since you only have to file an estate tax return and pay estate tax for amounts that exceed the lifetime exemption for gift and estate taxes, transfer taxes apply to very limited situations.
Generation-Skipping Transfer Tax
The generation-skipping transfer tax is similar to the estate tax, but it applies to transfers to those two or more generations below the person making the transfer, such as when a grandparent transfers assets to grandchildren. However, this too has multi-million dollar exemptions, so only a limited number of people end up having to pay this tax.
